Europe Sees No End to Bull Run

The European gas market continues to run with the bulls, spurred by fresh concerns over Russian’s ability to increase pipeline exports and continued competition for spare LNG cargoes from Asia and South America. Records have again been smashed this month. The month-ahead September contract on the Dutch TTF hub, Europe’s de facto benchmark, rose to fresh highs of €47.95 per megawatt hour ($16.55 per million Btu) on Aug. 16. The month-ahead contract on the UK National Balancing Point surged to 119 pence per therm ($16.49/MMBtu) the same day, breaking the previous record of 115 p/th set in late 2005. Questions over Russia’s ability to deliver more gas to Europe continue to drive sentiment, particularly as shipments through main export routes are falling. Flows through the Yamal-Europe pipeline crossing Belarus and Poland dropped at the start of August and fell further after a fire at a Gazprom condensate treatment plant on Aug. 5 (WGI Aug.11'21). From 82 million cubic meters per day on Jul. 30, Yamal-Europe flows from Poland to Germany dropped to about 35 MMcm/d after the fire and to 21.7 MMcm/d on Aug. 16, according to Entsog Transparency flow data. In addition, Gazprom is still restricting transit bookings through Ukraine (related). The combination of lower Yamal-Europe flows and reluctance to book incremental Ukrainian capacity has fueled concerns that Gazprom may not be solely pursuing a price-over-volume strategy. Some fear it may be unable to deliver more gas to Europe while also supplying the Russian market and refilling domestic storage depleted during the cold first quarter. Gazprom says average daily supply to the Russian market in August has been 9% above the eight-year monthly average. If Russia continues to restrict flows, there will be less chance to restock European inventories before the injection season ends in October. With storage just 62% full, Europe needs the gas, but "there is a chance that Europe is just not Gazprom’s priority at the moment, and that will not solve Europe’s supply problems,” a European gas trader says. The fact the company supplied Europe out of German storage after the fire, rather than bumped up deliveries via other export routes, could be a sign it does not have additional volumes to pump westward, the trader adds. Elsewhere, Norwegian output has not kept up with higher demand despite the obvious appeal of stronger prices. The Covid-19 pandemic forced suppliers on the Norwegian Continental Shelf to move the bulk of scheduled maintenance to this year, restricting flows in the second quarter in particular. Exports in July increased to over 300 MMcm/d before being hit by an unplanned outage at the massive Troll field from Jul. 25 to Aug. 5. They have since bounced back to more than 300 MMcm/d. But another round of scheduled maintenance will remove up to 46 MMcm/d from the market in the first half of September. Norwegian gas exports rose 2% year on year to 64.7 billion cubic meters from January to July, according to Statistics Norway. But that was below 67.5 Bcm in the same period of pre-pandemic 2019 and a recent five-year high of 69.15 Bcm in 2017. On the demand front, record high gas prices have encouraged coal-fired power generation in Western Europe, as have weaker wind output and high electricity demand. Gas was for the first time the biggest contributor to primary energy consumption in Germany, Europe’s largest economy, in the first half with a 30.6% share, according to think tank AG Energiebilanzen. Coal consumption will likely remain strong for the rest of the year, especially if gains in European gas prices continue to outpace EU carbon prices. But additional nuclear availability could restrict coal use in France. Jaime Concha, Copenhagen